Accounting for carbon

This paper designs an accounting system to track an entity’s progress in reducing carbon emissions. Being in the same form as financial accounting, it reports a balance sheet where assets that reduce carbon are offset by liabilities to do so, with the difference reporting an entity’s net position in emitting carbon and its progress in reaching milestones such as a net-zero carbon goal. The quasi-income statement reports the periodic net emissions that add to the balance sheet’s net position. By recognizing investment in carbon-reducing assets, an entity gets credit for efforts to mitigate carbon emissions that are realized only later, thus dealing with the timing problem between investing in carbon reduction and its effect. The responsibility accounting has attractive incentive and monitoring features and provides a framework for pro forma budgeting of carbon-reducing strategies, setting benchmarks against which actual results of strategies can be evaluated. It facilitates consolidation across entities to report on carbon for specific groups such as industries. By mirroring financial accounting, it facilitates the “double materiality” comparison of carbon performance metrics and financial performance metrics to evaluate trade-offs and “sustainability” more generally. For this purpose, the paper designs a carbon statement analysis that complements financial statement analysis.